Winder v. Commissioner

IRENE MCFADDEN WINDER, SURVIVING EXECUTRIX OF THE ESTATE OF SARAH AMANDA MCFADDEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Winder v. Commissioner Docket Nos. 12016, 12017. United States Board of Tax Appeals 17 B.T.A. 303; 1929 BTA LEXIS 2319; September 18, 1929, Promulgated *2319 Petitioner, having a life interest in certain coal royalties as residuary legatee through the will of the husband, made certain assignment in respect of such royalties to her children. Held that such royalties paid to the children by virtue of her assignment were income to petitioner. J. A. Lamorelle, Esq., for the petitioner. Joseph B. Harlacher, Esq., for the respondent. LITTLETON *304 The Commissioner rejected the petitioner's claim for the abatement of $4,149.14 income tax assessed for the calendar years 1919 and 1920, respectively, of which amounts $3,309.67 for 1919 and $2,987.73 for 1920 are in controversy. Stipulations by counsel eliminate all issues except the question whether $3,656.56 paid in 1919 and $4,167.49 paid in 1920 by the trustee to children of the petitioner by virtue of an assignment made by petitioner is taxable to her or to her children. Claims for allowances as deductions for depletion of $3,458.31 for 1919 and $3,712.78 for 1920 were withdrawn by petitioner. Certain facts are contained in a written stipulation between Irene McFadden Winder, surviving executrix of the estate of Sarah Amanda McFadden, and*2320 the Commissioner. The use herein of the word "petitioner" refers to Sarah Amanda McFadden. FINDINGS OF FACT. Sarah Amanda McFadden, late of Andalusia, Pa., died on the 21st day of May, 1926, leaving a last will and testament wherein she appointed John W. McFadden, executor and Irene McFadden Winder, executrix of her estate. John W. McFadden died September 20, 1927, and Irene McFadden Winder is now the surviving executrix of her estate. Charles McFadden, husband of Sarah Amanda McFadden, died March 4, 1895, leaving a last will and testament duly probated in the office of the Register of Wills for the County of Philadelphia, wherein he devised and bequesthed his residuary estate to a trustee therein named for the purposes set forth in the will. November 9, 1915, the Pennsylvania Company for Insurances on Lives and Granting Annuities was duly appointed substituted trustee of the estate of Charles McFadden. The last will and testament of Charles McFadden was introduced in evidence but is not necessary to be here set forth in full. May 23, 1917, Sarah Amanda McFadden entered into an agreement with John W. McFadden, Charles McFadden, Jr., and Irene McFadden Winder, children*2321 of the said Sarah Amanda McFadden, the pertinent portions of which are hereinafter set forth. The Commissioner in determining a deficiency for the year 1920 as set forth in his letter, December 21, 1925, included in petitioner's income for such year royalties amounting to $19,264.57, and in addition thereto included royalties amounting to $5,000, received by the substituted trustee from the Commercial Coal Mining Co. and royalties amounting to $466.20 received by the trustee from the Lincoln Coal Co. During the year 1920 the Pennsylvania Company for Insurances on Lives and Granting Annuities, substituted trustee of the estate of*305 Charles McFadden, deceased, received as oryalties from the Commercial Mining Co. the sum of $5,000 on account of the mining of coal by that company from a mine which was not opened until subsequent to the death of Charles McFadden. This sum of $5,000, under a decision by the Supreme Court of Pennsylvania (), was retained by the substituted trustee as a part of the corpus or principal of the estate of Charles McFadden, deceased, and was not distributed to Sarah Amanda McFadden during 1920 or at*2322 any other time. During the year 1920 the trustee received $466.20 as royalty from the Lincoln Coal Co. on account of coal extracted from a mine which was not opened until subsequent to the death of Charles McFadden. This amount under the decision of the Supreme Court of Pennsylvania, supra, was retained by the trustee as a part of *306 the corpus or principal of the estate of Charles McFadden, deceased, and was not distributed to Sarah Amanda McFadden during 1920 or at any other time. The Commissioner in determining a deficiency for 1920 as set forth in his letter, December 21, 1925, included the aforementioned sums of $5,000 and $466.20 as taxable income to Sarah Amanda McFadden for 1920. The Commissioner now admits that the amounts of $5,000 and $466.20 should not have been included in the income of Sarah Amanda McFadden for 1920, and agrees that the amounts be eliminated therefrom by the Board in determining the tax liability for 1920. During 1920 there accrued to Sarah Amanda McFadden in the hands of the trustee, coal royalties in the sum of $19,709.12, of which $15,541.63 was paid direct to the petitioner by the trustee, and the balance, $4,167.49, was paid*2323 direct by the trustee to petitioner's children in accordance with the agreement between her hand them. The Commissioner in determining a deficiency for 1919 as set forth in his letter, December 21, 1925, included in petitioner's income for such year royalties amounting to $18,324.32, and in addition thereto included royalties amounting to $6,388.92, received by the substituted trustee from the Commercial Coal Mining Co., and royalties amounting to $619.14, received by the trustee from the Lincoln Coal Co. During 1919 the Pennsylvania Company for Insurances on Lives and Granting Annuities, substituted trustee of the estate of Charles McFadden, deceased, received as royalties from the Commercial Coal Mining Co. the sum of $6,388.92, on account of the mining of coal by that company from a mine which was not opened until subsequent to the death of Charles McFadden. This amount was, under the decision of the Supreme Court of Pennsylvania in , retained by the substituted trustee as a part of the corpus or principal of the estate of Charles McFadden, deceased, and was not distributed to Sarah Amanda McFadden during 1919 or at any other*2324 time. During 1919 the substituted trustee received $619.14 as royalty from the Lincoln Coal Co. on account of the extraction of coal from a mine which was not opened until subsequent to the death of Charles McFadden. This amount of $619.14, under the decision of the Supreme Court of Pennsylvania, supra, was retained by the substituted trustee as a part of the corpus or principal of the estate of Charles McFadden, deceased, and was not distributed to Sarah Amanda McFadden during 1919 or at any other time. The Commissioner in determining a deficiency for 1919 as set forth in his letter, December 21, 1925, included the sums of $6,388.92 and $619.14 as taxable income to Sarah Amanda McFadden for 1919. The Commissioner now admits that these amounts should not have been included in the income for 1919, and agrees that the amounts be eliminated from income by the Board in determining the proper tax liability for 1919. During the year 1919 there accrued to petitioner in the hands of the trustee, coal royalties in the sum of $18,324.32, of which $14,667.76 was paid direct to the petitioner by the trustee, and the balance, $3,656.56, was paid direct by the trustee to petitioner's*2325 children in accordance with the agreement between her and them. By his last will and testament, Charles McFadden made certain bequests and devises to and for the benefit of his wife, children and grandchildren, but the only material and pertinent portion necessary to be here set forth is that part relative to the residuary estate left in trust for his wife, which is as follows: FIFTEENTH: All the rest, residue and remainder of my estate real and personal, I give and devise and bequeath unto my Trustee, hereinafter named, in trust nevertheless, to invest, reinvest and keep the same safely invested and to pay the net income arising therefrom in equal quarterly payments unto my wife, Sarah Amanda, as long as she shall live. I make this bequest with the firm belief that my wife will support such of my daughters as shall remain unmarried in the same way that I have done. May 23, 1917, Sarah Amanda McFadden entered into an agreement with her three children, John W. McFadden, Charles McFadden, Jr., and Irene McF. Winder, which recites: WHEREAS, Sarah Amanda McFadden is entitled to receive for and during the term of her natural life, the entire income from the residuary estate of*2326 Charles McFadden, deceased. AND WHEREAS, included in said income of said residuary estate, are certain rents or royalties from coal leases on properties owned by the Estate of Charles McFadden. AND WHEREAS, the said Sarah Amanda McFadden has, from time to time, from her income, given certain sums of money to the said John W. McFadden, *307 Charles McFadden, Jr., and Irene McF. Winder, for the support and maintenance of themselves and of their families. AND WHEREAS, it is the intention of the said Sarah Amanda McFadden to assign, transfer and set over to her children, John W. McFadden, Charles McFadden, Jr., and Irene McF. Winder, in equal shares, her entire right, title and interest in and to the rents and royalties received by the Trustee of the estate of Charles McFadden, deceased, from the coal leases hereinafter mentioned, in consideration of a release and agreement by the said John W. McFadden, Charles McFadden, Jr., and Irene McF. Winder, that they will not at any time in the future call upon or demand from the said Sarah Amanda McFadden, any sum or sums of money for the support and maintenance of themselves and their families. THEREFORE IT IS MUTUALLY AGREED*2327 by and between the parties hereto as follows: 1. Sarah Amanda McFadden hereby assigns, transfers and sets over unto John W. McFadden, Charles McFadden, Jr., and Irene McF. Winder, in equal shares, free and clear of their debts as hereinafter set forth, all of her right, title and interest in and to the rents and royalties paid to her as income from the residuary estate of Charles McFadden, deceased, by the Pennsylvania Company for Insurances on Lives and Granting Annuities, Trustee under the Will of Charles McFadden, deceased, out of or from the following described leases: * * * A number of leases, one already executed and numerous others only "proposed" and "not yet executed" are then mentioned, but not necessary to be here quoted. The agreement further provides: 3. In the event of the death of any one of the parties of the second part, during the lifetime of the said Sarah Amanda McFadden, the share of the rents and royalties otherwise payable to the one so dying shall be paid and distributed, until the death of the said Sarah Amanda McFadden, to the children of the said party of the second part of dying, living at the time of quarterly distribution of the said rents and*2328 royalties as hereinafter provided. 4. The said Sarah Amanda McFadden authorizes and empowers the said Pennsylvania Company for Insurances on Lives and Granting Annuities, Trustee under the Will of Charles McFadden, deceased, to pay to the parties of the second part and their children, in the event of their deaths as hereinbefore set forth, quarter-yearly, the rents and royalties hereby assigned. 5. Each of the parties of the second part agrees with the said Sarah Amanda McFadden, that during the lifetime of the said Sarah Amanda McFadden they will not ask for or demand any sum or sums of money from her, the said Sarah Amanda McFadden, for the support of themselves or their families. 6. The assignment by the said Sarah Amanda McFadden of the rents, income and royalties hereunder, shall enure to the benefit of the parties of the second part, or their children, in the event of their death, free and clear of their debts, contracts, engagements, alienations and anticipations, and free and clear of all levies, attachments, executions and sequestrations. 7. This agreement may be modified or revoked in whole or in part, at any time, by the said Sarah Amanda McFadden, by notice*2329 in writing at any time to that effect, delivered to the Pennsylvania Company for Insurance on Lives and Granting Annuities, Trustee under the Will of Charles McFadden, deceased. The signature of each of the parties is subscribed. *308 OPINION. LITTLETON: Sarah Amanda McFadden became vested with a life interest in certain coal royalties as residuary legatee, through the will of her husband, who died March 4, 1895. During 1920 there accrued to her in the hands of the trustee coal royalties in the sum of $19,709.12, of which $15,541.63 was paid direct to her by the trustee, and the balance, $4,167.49, was paid to her children in accordance with an agreement which she made with them, as hereinbefore set forth. It is insisted in behalf of petitioner that the amounts paid to the children, pursuant to the agreement of May 23, 1917, should not be taxed to her, as has been determined by the Commissioner. In considering this question it is well to observe carefully the wording of the agreement entered into by the petitioner and her children, which, among other things, provides: Sarah Amanda McFadden hereby assigns, transfers and sets over unto John W. McFadden, Charles*2330 McFadden, Jr., and Irene McF. Winder, in equal shares, free and clear of their debts as hereinafter set forth, all of her right, title and interest in and to the rents and royalties paid to her as income from the residuary estate of Charles McFadden, deceased, by the Pennsylvania Company for Insurance on Lives and Granting Annuities, Trustee under the Will of Charles McFadden, deceased, out of or from the following described leases. * * * (Italics supplied.) The assignment or transfer relied on appears to have been made as a voluntary act on the part of petitioner and without any legal obligation on her part of make the same, and she expressly retained the right to modify or revoke in whole or in part, at any time by notice in writing to that effect delivered to the trustee, the aforesaid agreement or assignment. It was in the power of petitioner to dispose of her income as she desired, and to confer it as a gift, in whole or in part, upon whom she chose, but her action in so doing would not alter the fact that the source of such income or royalties was the trust corpus of which she was the life tenant and to whom flowed the entire net income, even though at her direction*2331 a designated portion thereof was to be paid to others. In , the District Court for the Southern District of New York, in its decision, used the following language: To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt. *309 In , this Board, in its opinion, stated: Is the mere order by a property owner to his leassee to pay part of the rent or royalties to his wife or daughter, upon which the lessee acts, enough to take the income thus diverted out of the taxable income of the owner? So far as appears from the facts stipulated, there was no legal obligation to the wife and daughter at the base of the arrangement, and in the Meadowville and Lee Collieries*2332 leases the payment was "until otherwise ordered by" petitioner. Even if, under the local law of any litigation which might be founded on these leases, these designated payees might as third parties beneficiary enforce payment from the lessee directly to them, this would not prove that the owner had no interest in the amount or that it was not his income. . This decision, which the Supreme Court refused to review, , held that where the lessor had contracted away its right to receive rent and gave its stockholders a direct claim against the lessee, the rent was nevertheless taxable as income of the lessor. It is clearly authority for taxing the onwer in this case where, so far as the record shows, he merely designates another to receive during this pleasure. Conceded that he did not have actual possession of the amount so paid, possession is not the determining fact of income even on the cash receipts basis. * * * In , this Board said: * * * The income from taxpayer's interest in the partnership is first income to him, and*2333 no matter how he tries to dispose of it or does dispose of it, it is taxable to him as income from his interest therein. * * * If the contention made should prevail, the taxing law would be a nullity and an act of Congress imposing taxes made impotent at the will of the taxpayer. If he can escape taxation on one-half the profits of the partnership by agreement, there is no reason why, by another agreement, he can not escape taxation on the other half; and if this taxpayer can do so there is no end to the agreements which may be made, and income as such will cease to be an object of taxation. In ; ; ; ; ; and , there appeared to have been legally binding agreements, yet, notwithstanding such agreements, it was held that the income was taxable to the assignor. *2334 See also ; , holding that the Commissioner committed no error in taxing as income to Rosenwald the royalties paid to the children. Reviewed by the Board. Judgment will be entered under Rule 50.